Chapter 2 Solutions, A&B
Exercise 2-1 (10 minutes)
1. The wages of employees who build the sailboats: direct labor cost.
2. The cost of advertising in the local newspapers: marketing and selling cost.
3. The cost of an aluminum mast installed in a sailboat: direct materials cost.
4. The wages of the assembly shop’s supervisor: manufacturing overhead cost.
5. Rent on the boathouse: a combination of manufacturing overhead, administrative, and marketing and selling cost. The rent would most likely be prorated on the basis of the amount of space occupied by manufacturing, administrative, and marketing operations.
6. The wages of the company’s bookkeeper: administrative ...view middle of the document...
| | Cups of Coffee Served
in a Week |
| | 1,800 | 1,900 | 2,000 |
| Fixed cost | $1,100 | $1,100 | $1,100 |
| Variable cost | 468 | 494 | 520 |
| Total cost | $1,568 | $1,594 | $1,620 |
| Average cost per cup served* | $0.871 | $0.839 | $0.810 |
* Total cost ÷ cups of coffee served in a week
2. The average cost of a cup of coffee declines as the number of cups of coffee served increases because the fixed cost is spread over more cups of coffee.
Exercise 2-10 (45 minutes)
1. The scattergraph appears below:
Yes, there is an approximately linear relationship between the number of units shipped and the total shipping expense.
2. | | Units Shipped | Shipping Expense |
| High activity level | 8 | $3,600 |
| Low activity level | 2 | 1,500 |
| Change | 6 | $2,100 |
| | | |
Variable cost element:
Fixed cost element:
Shipping expense at the high activity level | $3,600 |
Less variable cost element ($350 per unit × 8 units) | 2,800 |
Total fixed cost | $ 800 |
The cost formula is $800 per month plus $350 per unit shipped, or:
Y = $800 + $350X,
where X is the number of units shipped.
The scattergraph on the following page shows the straight line drawn through the high and low data points.
3. The high-low estimate of fixed costs is $210.71 lower than the estimate provided by least-squares regression. The high-low estimate of the variable cost per unit is $32.14 lower than the estimate provided by least-squares regression. A straight line that minimized the sum of the squared errors would intersect the Y-axis at $1,010.71 instead of $800. It would also have a flatter slope because the estimated variable cost per unit is lower than the high-low method.
4. The cost of shipping units is likely to depend on the weight and volume of the units shipped and the distance traveled as well as on the number
of units shipped. In addition, higher cost shipping might be necessary to
Problem 2-23 (45 minutes)
1. High-low method:
| UnitsSold | Shipping Expense |
High activity level | 25,000 | $232,000 |
Low activity level | 16,000 | 160,000 |
Change | 9,000 | $72,000 |
| | |
Fixed cost element:
| Total shipping expense at high activity level | $232,000 |
| Less variable element: | |
| 25,000 units × $8 per unit | 200,000 |
| Fixed cost element | $ 32,000 |
| | |
Therefore, the cost formula is: Y = $32,000 + $8X.
2. | Alden Company |
| Budgeted Income Statement |
| For the First Quarter of Year 3 |
| | | |
| Sales (21,000 units × $50 per unit) | | $1,050,000 |
| Variable expenses: | | |
| Cost of goods sold
(21,000 units × $20 per unit) | $420,000 | |
| Shipping expense
(21,000 units × $8.00 per unit) | 168,000 | |
| Sales commission ($1,050,000 × 0.05) | 52,500 | |